Monday, July 05, 2010

The Great British Economy Disaster

by John Lanchester

London Review of Books (March 11 2010)

Fanfares, ticker-tape parades and pompom-wielding cheerleaders failed to greet the news that the UK economy grew by 0.1 per cent in the quarter-year to December. That's as it should be, because this is as fragile as a recovery can possibly be, after six quarters of economic contraction. This is assuming we can trust the figures, which we almost certainly can't, not because of government fiddling but because the data come in over time, and retrospectively alter the GDP estimate. The number goes on changing for months, indeed years. It may well be that the position is worse than it looks. It may be that it's better: unemployment fell by 7000 in December, beating expectations, so perhaps the economy is in better nick than 0.1 per cent growth suggests. On the other hand, the forward movement is so feeble it could easily snap back into reverse. Anecdotal evidence says that the cold weather caused mayhem in retail during what should be the sales period of January. The new year's rise in VAT, back to the old rate of 17.5 per cent, gave an artificial boost to the last quarter, as people acted to beat the increase. Take that effect away and the next quarter might well undergo a corresponding bump downwards. The scrappage scheme for knackered cars ends soon. These factors together might tip the UK back into recession. The new quarter's data will be published in lateish April, right at the climax of the general election campaign. If the figures show that the UK has gone back into recession, Labour will be in big trouble.

For the moment, though, let's accept the data at face value. We had the longest period of sustained economic growth since records began, followed by the longest period of sustained economic contraction since records began, all of it under the leadership of a government that repeatedly and explicitly promised 'an end to boom and bust'. {*} You used to hear men of the world say that 'Labour's biggest achievement has been not fucking up the economy'. You hear less of that now.

{*} An entertaining recent development is that Brown has taken to claiming that he promised an end, not to boom and bust, but to 'Tory boom and bust'. See what he did there? There is a discussion of the point on the Channel 4 website, if you Google 'factcheck end to boom and bust'.

One has to admit that the impact of the recession has been peculiar. The unemployment data might be less bad than expected, but 511,000 people still lost their jobs in the year to December, at the rate of 1400 jobs a day. A British property is repossessed every eleven minutes. It has been both the deepest and the longest downturn since records began. And yet, to be honest, it hasn't quite felt like it. The recession has been unevenly distributed. The milder downturns of the Tory years seemed harsher and more widespread. Perhaps this is an artefact of a lower pound, which has made the visited parts of Britain seem busier; of the drop in mortgage interest payments, which has put significant wads of cash in many houseowners' pockets; and of still rising public sector pay. It may also be that because the country is, in absolute terms, richer than it was, we notice the downturn less. We are declining from a much higher base, and that seems to make a subjective difference.

Any or all of these factors could go into reverse - and even if they don't, the recovery will be hard. The historic pattern, unfortunately, is that as many people will lose their jobs in the initial recovery as lost them in the downturn. The principal reason for this is that businesses keep going under at a significant rate. The primary source of winding-up petitions - applications to have a firm put into receivership for non-payment of bills - is the taxman. In recessions the Inland Revenue tends to be understanding towards the difficulties of businesses and individuals. When things pick up, he goes back to being bad cop. Also, when businesses are quiet, they are worth less. If a company owes you money, but is doing so badly that its assets (its stock, say, or its premises) are worth very little, you'd be well advised to wait for it to recover before you demand your money back. So that's what creditors do: when the assets have recovered some value, that's when they insist on being paid. For these reasons among others, recoveries from recession tend to be long and hard.

There is an additional complicating factor this time, and it is the amount of fuel the government has pumped into the economy. Interest rates are at historically unprecedented lows, and the government has spent GBP 200 billion on quantitative easing, in effect buying things from itself with virtual money. We have a record deficit amounting to 12.8 per cent of GDP - that's the gap between what the government is taking in revenue and what it is spending. That's worse than Greece. In 2008 and 2009, we had gross debt amounting to 55 per cent of GDP; by 2010 and 2011 we will hit 82 per cent. In plain English, we've gone into debt at a speed never before achieved, and have built up debts never before seen in peacetime. The foot is on the floor and the needle is in the red. There's no choice except to slow down - but nobody knows quite how to do it, because it's never been done before.

Put all these things together, and the state we're in doesn't look peachy. The imminence of the general election doesn't help. Broadly speaking, the circumstances are such that it shouldn't much matter who wins the election, not in economic terms. The economic realities are harsh and are likely to determine most of what the new government does. Labour have promised to cut the deficit in half within four years. They haven't spelled out how they are going to do it, and until recently Gordon Brown was talking about 'Tory cuts versus Labour investment' - which, given what he must know about what the figures mean, is jaw-droppingly cynical. The reality is that the budget, and the explicit promises of both parties, imply a commitment to cuts of about eleven per cent across the board. Both parties, however, have said that they will ring-fence spending on health, education and overseas development. Plug in those numbers and we are looking at cuts everywhere else of sixteen per cent. (By the way, a two-year freeze in NHS spending - which is what Labour have talked about - would be its sharpest contraction in sixty years.)

Cuts of that magnitude have never been achieved in this country. Mrs Thatcher managed to cut some areas of public spending to zero growth; the difference between that and a contraction of sixteen per cent is unimaginable. The Institute for Fiscal Studies - which admittedly specialises in bad news of this kind - thinks the numbers are, even in this dire prognosis, too optimistic. It makes less optimistic assumptions about the growth of the economy, preferring not to accept the Treasury's rose-coloured figure of 2.75 per cent. Plugging these less cheerful growth estimates into its fiscal model, the guesstimate for the cuts, if the ring-fencing is enforced, is from eighteen to 24 per cent. What does that mean? According to Rowena Crawford, an IFS economist, quoted in the Financial Times: 'For the Ministry of Defence an eighteen per cent cut means something on the scale of no longer employing the army'. The FT then extrapolates:

At the transport ministry, an eighteen per cent reduction would take out more than a third of the department's grant to Network Rail; a 24 per cent reduction is about equivalent to ending all current and capital expenditure on roads. At the Ministry of Justice an eighteen per cent reduction broadly equates to closing all the courts, a 24 per cent cut to shutting two-thirds of all prisons.

This is good blood-curdling stuff. But it is, I think, impossible for anyone to believe that any British government will ever administer cuts in public spending of that order. Getting rid of the army or of the courts? I don't think so - and yet that's the magnitude of change promised by the promised assault on public spending. The political parties are doing everything they can to look serious about cutting the deficit, but they won't go anywhere near specific proposals, and for good reason: to do so would be electoral suicide. That in turn means that even if they wanted to administer this order of cuts, they would have no mandate to do so.

So why all the posturing about the deficit? 'I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter', James Carville said in the early years of the Clinton administration. 'But now I want to come back as the bond market. You can intimidate everybody.' It is the bond market, more than anything else, which is currently forcing the government to pretend to take the deficit seriously. This is one of the reasons for the tensions between Gordon Brown and his chancellor. Brown is allergic to the word 'cuts'. He clearly experiences actual physical difficulty with the term, for good reason, since it does a lot to invalidate most of what he's done in office over the last thirteen years. Darling, on the other hand, has to placate the markets, and they demand a higher degree of fiscal rectitude from the UK, which means lower spending and higher taxes. If Darling doesn't look convincing, there will be a 'buyer's strike' and nobody will want to buy the many tens of billions of pounds of debt which the British government is going to have to issue over the next years. If that happens, the government will have a very serious problem. You can lie to the electorate, but you can't lie to the bond market, which is why there will certainly be cuts, severe ones - just not quite as severe as the Texas Chainsaw Massacre scenario implied in the budget. These constraints on action are going to be in place whoever wins the election.

To economists, there is a glaringly obvious solution to this conundrum: inflation. In the present circumstances, any government, faced with a mountain of debt, would want to use inflation to erode the real value of the debt. Even a relatively modest (by historic standards) level of inflation, say four per cent, will in ten years take away a third of the value of the debt. That's pretty good going, in return for not having to do anything to reduce the deficit. The trouble is that the Bank of England has a mandate to keep inflation to a target of two per cent. This was the figure set by the incoming Labour government when it handed the control of inflation over to the bank in 1997: the single most important decision it took about the economy, and one not mentioned or hinted at in either its manifesto or the general election campaign. At the same time, Labour took away the regulatory role of the bank and gave it to a new agency, the Financial Services Authority, which essentially relied on the market to regulate itself, with results we can now all clearly see.

So, two per cent. That is a historically low figure, and it is one which, when times are hard, doesn't give much wiggle room to the government to cut interest rates. These are almost always two or three percentage points above the inflation rate (they have to be, otherwise nobody would ever deposit money anywhere that paid interest - it would be a guaranteed way of losing money). If inflation is two per cent, and interest rates are five per cent, then the bank has the power to cut interest rates by five per cent before it runs out of room for manoeuvre. This is what has happened now, with interest rates at a historically unprecedented 0.5 per cent. There is nowhere else to go; hence the need to resort to the quantitative easing bag of tricks, to pump some life into the economy. If the inflation rate had been higher, say four per cent, then there would have been more wiggle room.

It might be tempting to let inflation go even higher, creeping up towards the double-figure levels which were standard for long stretches of the 20th century - but this is where the bond market comes in. That level of inflation would eat away the value of bond investments. Governments can live with the pain inflation causes their own citizens (such as the erosion of the value of savings, and agony for people who live on fixed incomes), but they can't survive one of those famous bond market 'buyers' strikes'. So the interest rates on bonds would have to go up sharply, to keep investors onside; that in turn would have severe consequences for business and the economy and unemployment. The acceptable limit on inflation, therefore, is pretty low. As it happens, the IMF has recently started saying that the UK inflation target is too low. It has four per cent in mind. That offers more room for manoeuvre, and although the bond market might grumble, it wouldn't mind too much, because this would also involve new bonds being issued at more interesting interest rates than the current ones. The yield for a Treasury bond paying until 2049, for instance, is 4.25 per cent. That, in return for tying up your cash for forty years, is unsexy. A period of higher inflation would juice up the return on newly issued debt. So the bond market (which really, truly is the force which determines what happens in this area - I can't stress that enough) would probably let the government get away with four per cent inflation. Slight problem: the two per cent figure is a binding target, to which both parties are committed. Hmm.

What all this adds up to is a set of constraints so clear they are almost a diagram. The government has to cut the deficit. That involves raising taxes and cutting spending. The government can't do it too quickly, or it would tip the country back into recession. But the government will have to administer some cuts in spending, because the bond market insists on it. The government can't cut too thoroughly, because the electorate won't wear it. Inflation looks like the only way out. Not too much inflation, because the bond market wouldn't like that. Also, the rules currently forbid it - but the rules, let's face it, are the least of the problems.

So it's easy to see why financial insiders think it doesn't make much difference who wins the next election. If the Tories win, they will emulate Thatcher and have an emergency budget within weeks of the election, at which they will, I imagine, put VAT up to twenty per cent and announce a range of cuts timed to kick in, probably, a year later. The mood music will be dark and they will go to extravagant lengths to blame everything bad on Labour, with the intention of making this point stick through the difficult months and years ahead. (President Obama, keen to seem above the fray, hasn't done that to the Republicans - which is probably a mistake. In the equivalent position in 1981, Reagan never missed an opportunity to criticise the economic legacy of the Carter administration.) The Tories might well reset the inflation target, on a 'desperate times demand desperate measures' basis, and assuming there will never again be as clear-cut a window of political opportunity. Inflation might not be far off four per cent anyway, since at the time of writing it has already hit 3.5.

And if Labour were to win? The same. Only the blame game would be different. As Stephanie Flanders of the BBC points out on her excellent blog, when the rhetoric is stripped out and the differences between the parties emphasised, they come down to a largely cosmetic debate about the timing of the cuts, and a difference of about one per cent of GDP.

The fact that neither main party is willing to talk in plain English about this is disappointing but not surprising. One can see why the Tories have a problem. George Osborne, last year, was franker than men in his position usually are when talking about the need for cuts, but there were signs in the polls that the electorate didn't like it much, so the rhetoric has been wound down a little. Osborne isn't going to offer hostages by being specific about what he's going to do. That would immediately offer juicy targets for Labour. So all he can do is gurn and bluster about cuts while not saying anything that gives him a real mandate to enforce them.

This non-specificity adds to the aura of doubt beginning to accumulate around Oik. (That was Osborne's nickname in the Bullingdon Club: he was an oik because he didn't go to Eton, only St Paul's.) It is the Opposition's job to oppose, and perhaps the Tory high command did not want the financial crisis to resemble the Iraq war as a crisis where both the big parties disagreed with public opinion. But the practical effect of the opposingness has meant that, since the credit crunch, Oik has been wrong on big questions a number of times. Darling shares responsibility for our having arrived at this predicament, but during the crisis phase of the credit crunch he made a series of bold, decisive, correct choices. By opposing them, Oik has raised questions about his own competence. He was wrong to oppose the bank nationalisations, and wrong to oppose the stimulus package to restart the economy. He was right to think that the FSA, the failed regulator, should be abolished but wrong to say so in public, since that left the financial industry going through a critical period with no adult supervision except a lame-duck regulatory authority. He is right to want to talk about breaking up the banks but so vague on details that it isn't clear whether he's going to do anything about it when/if in office. It might be unfair to criticise Oik over the very few concrete proposals he has made about spending cuts, since even these token gestures far exceed anything Labour has managed - but it's still the case that the costing of the proposals looks shaky. It didn't help that David Cameron got his Boden knickers in a twist about whether or not the Tories are going to subsidise marriage through the tax system.

The sight of the Tories beginning to flounder in this area prompts a dark thought. I've argued that economic constraints are such that the parties would, in office, be much of a muchness. But that idea is based on the assumption of managerial competence on the part of the Tories. We have all more or less got used to the idea that British politics is now managerial rather than ideological, not revolutionary Petersburg or Periclean Athens so much as Oslo city council; it would be grim indeed if a new government turned out not to be able even to manage.

Conclusion: whatever the political hue of the new government, it has to walk a fiscal tightrope. It is probably going to be a very good election to lose. Faced with this, the trajectory of the public mood will, I think, closely match that of the Kubler-Ross grief cycle. At the moment, thanks to the subjective mildness of the recession, we are still in denial. Next, as the full extent of the bill becomes clearer, there will be anger, especially since the hard times will have next to no effect on the bankers and politicians who, in the public mind, caused the crisis. Then there will be a 'helpful for the government' period of inflation. Then interest rates will shoot up in an attempt to control inflation, and at the same time we will see tax rises, services closing and job losses. It's at this point, as the recovery begins to seem like a tractionless slog, that we'll go through the depression stage of the cycle.

The question of the public mood, and of public anger, brings us by easy stages to the banks. More than a year on from the credit crunch, the question of what is to be done about the banks is still being addressed in mainly rhetorical terms. My fear, from over here in the cheap seats, has been that the level of action has a precise inverse correlation to the talk, so that when governments talk tough about what they are going to do to control the banks and 'crack down on bonuses', what they are in fact intending to do is nothing. That would mean continuing with the status quo ante and with Too Big to Fail banks that have a taxpayer-underwritten guarantee against losses. This view has yet to be proved wrong; no meaningful proposals to effect change have been enacted. That doesn't mean they never will be, but the time for lawmakers to get on with it is upon us.

The one thing which gives me hope that things will actually happen was the Democrats' defeat in Massachusetts. The next day, Obama appeared in public with Paul Volcker. (Volcker is one of the central characters in modern American economic history. He was Carter's appointment as head of the Federal Reserve, with a mandate to defeat inflation. He did that by hoicking interest rates, with unpopular short-term consequences which helped eject Carter from office, but with long-term success. Volcker's actions paved the way for the boom in the US economy which began under Reagan, who reappointed him to the Fed once and then declined to do so again, largely because he wasn't enough of a zealot for deregulation. How the wheel turns.) Standing beside Volcker, Obama for the first time adumbrated proposals which genuinely upset the banks. His plan is for a levy on the size of a bank's assets, a fairly pure tax on bigness, combined with a ban on 'proprietary trading', which is the gambling that banks do with their own money. Never mind that neither of these proposals would do the most urgent thing, which is to arrange a way for banks to fail like normal businesses, without risking the rest of the economy; never mind that proprietary trading didn't have all that much to do with the credit crunch; never mind that the proposals that emerge from Congress in an election year are likely to be watered down to sub-homeopathic levels. The thing that shocked bankers was the evident intent. This really was an attempt to put serious constraints on their behaviour. Waah! Not fair!

It was bonuses which put bank-bashing back on the rhetorical and legislative agenda. Anyone prone to thinking that investment bankers are geniuses should look at their catastrophically maladroit handling of the bonus issue this year. Goldman Sachs clearly thought they were exercising heroic self-denial by awarding themselves a compensation pool amounting to a mere $16.2 billion. Haiti's total GDP is $7 billion, and even before the earthquake one child in eight died before its fifth birthday; imagine Goldman turning over half its trough to Haiti in an attempt to change those numbers. Instead they praised their own 'restraint' in awarding themselves only 36 per cent of their revenue in pay pool, down from the usual fifty per cent. News of these restrained bonuses came out the same day as Obama's bank proposals. The Goldmaners must have been left wishing they hadn't bothered.

Bank bonuses are a moral and political problem at the best of times. This year, the levels of bonuses across the industry are unconscionable. There are three reasons for that. First, thanks to the special measures currently in place the banks can borrow from their governments at, effectively, zero per cent rates of interest. They can then invest the money at higher rates of interest, five to seven per cent, say. This is a direct transfer of wealth from the taxpayer to the banks, and the only difference between it and an actual, physical licence to print money is that the banks don't have a piece of paper with the words 'Official Licence to Print Money' written across the top. Second, the banks' balance sheets are still clogged with the famous toxic assets. Last year, these assets could not be sold, so they were worth nothing; thanks to the accountancy practice called 'mark-to-market', which insisted on the assets being recorded at their current value, this left big holes on the banks' balance sheets where the assets should be. The US and UK governments launched lavishly expensive schemes designed to restore confidence to the market in these assets (in the US, the scheme offered investors a dollar of value in return for fifteen cents of their own money) and the market gradually recovered. So the assets got their value back, and the bank's balance sheets rocketed upwards - again, thanks to the taxpayer. Under these conditions, your deceased Aunt Mavis could have generated record returns simply by not doing anything. Third, the collapse of competitors has created unprecedentedly favourable conditions for the remaining banks. Hard times are good times for banks that are still in business: winding up, fire sales, mergers, bankruptcies, emergency debt issues, debt-for-equity swaps, are all sources of lucrative fees. The banks' activities in this area have always been cartel-like - their fees are known for being suspiciously similar - but with so little competition around, it's a fiesta. All of this is underwritten by the taxpayer's guarantee to keep the banks in business if they rack up another set of huge losses. Under these circumstances, this year's bonuses really are, I use the word again, unconscionable.

Obama's proposals are at heart an attempt to make the banks less profitable, and make them seem to be paying back the cost of the bailout. No bank would have survived a systemic collapse; the banks are in business thanks to the taxpayer, and their behaviour must change to reflect that. The banks are going to extravagant lengths to avoid getting this point, which in truth is a fairly simple one. The culture of banking is going to be a difficult thing to change, even after the legislative framework has been altered to reflect new realities.

I have another practical suggestion to make the banks less profitable: one which has the advantage that it would generate money for the government to replace lost tax income on bank profits. It is that the government should set up a section of the Treasury to compete directly with the banks over their suite of services to big companies - mergers, IPOs, advice and the rest. At the moment the investment banks effectively operate a cartel, and charge business a fortune for their services. The Treasury could do that as well or better, and cheaper; it would force real competition in an area where there isn't any, and reduce the predatory nature of the banks' relationship with business and industry. There would need to be Chinese walls around this department of the Treasury, but I see no reason why it wouldn't be both profitable and socially useful.

So what about that legislative framework? The ideal thing would be if someone had a single brilliant idea which magically made the banks safe - which means safe-to-fail. Hank Paulson, Bush's last Treasury secretary, put it well:

To address the perception that some institutions are too big to fail, we must improve the tools at our disposal for facilitating the orderly failure of a large, complex financial institution ... The real issue is not that an institution is too big or too interconnected to fail, but that it is too big or interconnected to liquidate quickly. Today, our tools are limited.

True. Sadly, though, he said that in a speech in July 2008, before the great implosion, and that set of proposals is still not here. In the absence of that idea, and the presence of these gigantic banks, we are going to treat the banks the way the Lilliputians treated Gulliver, and tie them down with lots of little ropes. Much of this is deeply unerotic stuff about things such as capital reserves, liquidity and leverage ratios, all of them converging on the theme of (simply put) making the banks have more cash in hand to help them in a crisis. The model should be Canada, which was the only big Western country not to have a banking crisis, in large part because its banks are both by statute and by custom protected by higher capital reserves. It is also important that the provisions are counter-cyclical, as it's called: in other words that money is put aside in the good times to defend against the possibility - or the inevitability - that they will then go bad.

The principal vehicle for these rules is Basel III, the set of bank accords currently being thrashed out. Basel I was the first set of such international rules; because new forms of financial instrument kept being invented, Basel II came along to try to control and legislate the trade in derivatives, with such success that the global financial system blew up. The rules were pure of heart but they were written on the assumption that derivatives were an effective way of dispersing and therefore managing risk; they didn't allow for the systematic misuse that caused the credit crunch. It's tough to blame rule-makers for the behaviour of people who are certain they know better than the rules, and go to great, ingenious lengths to circumvent them. Basel III will have to Canadianise the world's banks. It will also have to write regulations that make more allowance than ever before for the subset of bankers who spend their energies on trying to get round the regulations. That's an easy thing to wish for and a hard thing to do. It is also critical that the action be co-ordinated and international, because otherwise the banks will blackmail governments with the threat of taking their tax-generating activities elsewhere, and seek to negotiate safe havens where they can carry on business in the old unregulated way.

Among the things Basel III (or some other legislative regime) must do is bring in laws to control the use of derivatives. The first and most essential requirement is something that a complete outsider to the system notices within the first five minutes of having derivatives explained to him: it is that there is no central place where derivatives are traded. The overwhelming bulk of them are exchanged 'over the counter', that is between two parties directly, with nobody else knowing anything about the trade, and no monitoring or supervision. Nobody knows how the derivatives 'net out', that is what the different bets, when stacked against each other, add up to mean. Nobody knows what the risks are or who is taking them. This was a hugely important factor in the jamming up of the financial system, since when Lehman collapsed, nobody knew who was vulnerable to the damage from its gigantic exposure to derivatives. A central exchange for this trade has been a critical necessity for some time.

The technical rules add up to the first set of Lilliputian ropes. We need more. In the US, the Glass-Steagall Act, separating investment banking (the casino where the banks bet against each other, and against us) from retail banking (the piggybank where we keep our money) was only abolished in 1999. Banking was manifestly safer under Glass-Steagall: manifestly less profitable too, which from the point of view of the wider polity is a good thing. It is hard to re-regulate, and to make fish out of fish soup. But that is what we are going to have to do. The break-up of our huge banks into separate components is not a panacea and as critics are quick to point out, several 'narrow banks' (narrowly defined banks of the desirable type) have failed, both historically and in the current crisis. However, the recent narrow-bank failures, such as that of the Dunfermline Building Society, took place in a context of systemic collapse caused by the status quo; that kind of systemic collapse, deriving most of its momentum from a general crisis of confidence, would be less likely if consumer deposits were less at risk.

Darling's line on this is that the problem with the banks is not size per se, but interconnectedness - the ways in which the banks are so deeply interwoven in each other's business, and in their own different strands of business too. He's right about the interconnectedness but this is an 'and' rather than a 'but': the banks are both too big and too interconnected. I would love to have a snake-oil type solution to the question of interconnectedness, but I don't. If somebody else does, I haven't heard about it. Big, big problem.

A proposal which might help is the Tobin tax, a global levy on all financial transactions, named after its inventor, the Nobel laureate James Tobin, who began touting the scheme in 1972. The analogy would be with email spam: if it cost some minute amount, say a penny, to send an email, it would have no effect on the righteous, but would immediately destroy spam as a business, because spam depends on sending tens of millions of free emails daily. Similarly, a tiny levy on every financial transaction would introduce just enough grit in the system to slow down the operation of the global casino, most of whose activity consists in zero-sum betting: gambling in which the banks bet against each other, and one wins what the other loses, to zero public benefit. It seems a good idea to me and to other fans such as Nicolas Sarkozy, and its main flaw is that it isn't going to happen, because the Obama administration promptly and definitively nixed it. That was back in the days before the penny dropped with Obama that the banks were so unpopular he could no longer take all his advice from their internal advocate in his administration, Tim Geithner. Perhaps Obama will un-nix it if another nasty surprise is self-generated in the world of high finance. How likely is that? Very likely indeed, I'd have thought, given that the underlying stresses of the global financial system have been addressed purely through talk.

In the general gloom I have only one piece of potentially good news, and even that might be wishful thinking. The bank bonuses this year are so grotesque that there are only two explanations for them. One is that investment banking culture truly is psychotic, in the strict sense of being out of touch with reality. That's possible. The other explanation is that, as a French economist said to me when the crunch kicked in, 'It's over'. He meant the whole obscene-bonus culture, the model in which the banks' shareholders let the bankers pay themselves half what the bank 'earns', in the context of a regulatory and political framework in which the banks are allowed to do whatever they like. The proposals now being touted do not guarantee systemic safety, but taken together they will, for sure, make the system much less profitable. Maybe, just maybe, the bankers are pigging out this year because they suspect this is the last of the good times. If we're looking for a glint of silver lining, does that count?